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Battle to settle iron ore prices heats up

(China Daily/Agencies)
Updated: 2008-06-24 11:12

The annual battle to settle iron ore prices appears headed toward deadlock, but exchanges are quietly looking at developing contracts that could change the way the industry sets prices.

Analysts tipped the Singapore Exchange as most likely to be the first to carry an over-the-counter iron ore contract, which would create a more transparent pricing mechanism for the more than $200 billion industry and let some of the heat out of what some see as over-inflated spot prices.

"The dynamics in the iron ore market is changing from one dominated by long-term supply contracts, to the point today where rampant demand has created a viable spot market," ANZ's senior commodities analyst Mark Pervan said.

"What has accentuated the need for a contract, especially in Asia, is the increase in freight spreads for iron ore from producers in different parts of the world," he added.

Earlier this year, Chinese steelmills settled annual contracts with Brazilian miner Vale at levels 67 to 71 percent up from last year.

But they are yet to settle with Australian miners who argue that the lower cost of freight from Australia to China, versus Brazil to China, should be reflected in higher prices for Australian material, a sticking point for the Chinese.

The freight differential has always been there, but has been given extra prominence by an 1,100 percent rise in the Baltic Dry Cargo Index (BADI) in the past six years.

Last month Deutsche Bank launched an over-the-counter iron ore contract and the bank said exchanges were looking at developing their own.

"A number of exchanges will be looking into some form of iron ore contract. There is a lot of demand for this kind of product, which we are already seeing in our newly launched OTC iron ore product," Raymond Key, global head of metals trading at Deutsche Bank said.

Traders in London, Sydney, Singapore and Hong Kong report talk that an Asian exchange may announce something late in the third quarter, and although there is no definite word, Singapore is the hot pick to be first.

"Singapore seems like a viable center. It's the gateway between Asia and the Pacific basin. The Australians will want a stable and well-developed exchange and importantly, Singapore is also BHP's big marketing hub in Asia," a trader in Sydney said.

Other exchanges mentioned that might be interested in iron ore contracts included Hong Kong and Mumbai.

"Hong Kong may be sniffing at iron ore, but it's Singapore that I think is probably furthest along," a source at an international trading house based in the city-state said.

"They already offer a freight contract and it wouldn't be too hard to develop iron ore, and even coal contracts along similar lines," he added.

A spokesman at the Singapore Exchange would not confirm that the organization was considering iron ore.

"As and when we have new products, we will make the announcements," he said. India's National Commodity and Derivatives Exchange seemed to rule itself out.

"Launching iron ore contracts in India may not be fruitful. The iron ore exported from India has different specifications so standardizing a contract for futures trade is very difficult," said Ramesh Iyer, vice-president, metals at the Mumbai exchange. And the London Metal Exchange also seemed an unlikely winner.